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Application of Models to the airline industry

Chapter 3
In the previous chapter the 3 models (Diamond, Five Forces and PEST) were discussed. In this
chapter we are going to apply the various aspects of the models where it is applicable. We are
comparing the Pakistan airline industry with the Indian Airline Industry. This will give us a
bigger picture about the airline industrys competitiveness which will help us in determining the
missing pieces for our research and what needs to be done.

Diamond Model
Factor Conditions
Airline industry requires a large amount of raw materials for the construction and maintenance
of the aircraft. Some basic include metal alloys (aluminum and titanium) and steel. The
construction of the aircraft is not locally done but the aircrafts are imported from abroad. As
manufacturing takes place in the US and Europe, there is no need for local raw materials. One of
the problems is also over employment in this sector which results in inefficiency (30-35 thousand
is the employment figure).Skilled labour is approximately 68-74%.Infrastructure is desperately
needed for the development of runways and new airports. The major airports of the country are
situated in Karachi, Islamabad, Lahore, Peshawar .Multan and Gwadar. Jinnah International
Airport (Karachi) is the largest airport in the country.
Demand Conditions
Recent development has shown an increase in the demand for the services.(figure). There has
been generally high growth pattern in businesses and the size of the population. Safety standards
have also improved. There has been deterioration in other modes of transport which are both
time consuming and uncomfortable when compared to air-travel. Local demand in Pakistan is
primarily concentrated in five major cities Karachi, Lahore, Islamabad, Peshawar and Quetta.
Internationally, the strongest market for Pakistani airline industry is the Middle East. Failure to
diversify.
Firms Strategy and Rivalry
In the airline industry, PIA is the largest, followed by Airblue and then Shaheen. There is some
form of collaboration with foreign airlines. difficult to determine r and d investment. Interfirm rivalry can only really be assessed on a domestic level seeing as PIA is the only truly
international airline with 40 international routes. Airblue has a total of 4 international
destinations and Shaheen has 7 or 8. The domestic market shares for each airline company are as
follows

PIA 74%

Airblue 20%

Others 6%

It can clearly be seen from this market composition that competition is mainly between PIA and
Airblue. PIAs basis of competition is because of its brand name and advantage of customers
loyalty.
Related Supporting Industries
The civil aviation industry lacks alliances and coalition that would allow it to perform better,
especially considering its given situation. In cases of delays in long-haul flights each airline
company has contracts with different hotels in the area, particularly for flight crew. So we can
say that a lot of development is needed.

Pest Model
Political Conditions
As far as Pakistan is concerned, Political factors have impacted the operations, profitability,
growth and development of each and every industry. The political environment of a country is of
vital importance to businesses and domestic political uncertainty in Pakistan which has prevailed
for too long and has invariably affected the countrys investment, trade, growth and
development. Travelers will not prefer visiting countries that are prone to political instability.
The impact on tourism gives testimony to the fact that political climate has indeed effected this
industry. Numerous foreign airlines stopped their business in Pakistan after 9/11. These include
British Airways, Singapore Airlines, Malaysian Airlines, Gulf Air, China Air and Saudi Airlines.
Open Skies Aviation Policy was adopted in the early 1990s by the government which was
basically a memorandum of understanding with a number of countries of the region and outside.
The purpose of this was to call for the liberalization of rules and regulations on international
aviation industry and open a free market for the airline industry.
Economic Factors
There has been persistent rise in jet fuel prices and oil price volatility which has made it
extremely difficult for the airline industry to cut its costs. Cost of borrowing is also higher
because the increase in interest rates. Consumer demand has fallen greatly due to the ever

increasing inflation which has also led to an increase in the price of aircrafts, food, products of
related and supporting industries.
Social Factors
Increased popularity of foreign travel due to a variety of factors has resulted in a boom in
demand for air travel. People are now more eager to travel to other countries is due to changing
tastes and trends. Media has invariably contributed to culture and norms of people and due to
increased urbanization there has been an increase. Hajj attracts a huge number of customers
However this increase in demand has been somewhat offset by an increase in international
terrorism.
Technological Factors
Major technological changes are taking place in the airlines industry with innovations in the
reservations and booking systems. Internet plays a key role in e-ticketing as consumer can easily
reserve tickets or check the status of the flight. Airblue was the first airline in Pakistan to install
Sabre system followed by the market leader, PIA. Pakistani Airlines have to be abreast of the
technological developments in e-commerce and aircraft manufacturing technology in order to
gain a competitive advantage.

Porters Five Forces:


Threat of new entrants
Initially, PIA enjoyed a complete monopoly. But in 1990s after the declaration of the Open Sky
Policy it encouraged private sector investment. This lowered barriers to entry. However it cannot
be forgotten that the initial investment is extremely high and requires a great deal of credit from
banks which acts as a significant barrier. Economies of scale are often difficult to achieve due to
under utilization of aircrafts.
Threat of substitutes
Substitutes for air travel are other modes of transport which include trains, buses and cars.
Distance from Islamabad to Lahore is shorter and hence buyers may be inclined to use cars or
buses to save cost. However it is not a solution for long distances. This factor depends upon the
customer segment which depends upon time, money and convenience.

Bargaining power of suppliers


The price of jet fuel is directly related to the cost of oil. This price is determined by international
markets. An individual company does not have the power to influence it. There is cut throat
competition among suppliers and they are very likely to integrate vertically. Oil is an integral
input of the airline industry and has the power to directly influence airfares. Hence, the oil
suppliers have high bargaining power.
Bargaining power of buyers
Travelers can easily compare prices and can find price variations for the same flight. Vacationers
will want the best deals, whereas business travels are frequently more pressed to time and are
less price sensitive. Despite intense competition, air travel is not cheap and command substantial
finances of a vacation. Hence, for vacationers the demand is highly elastic (as the price drops
demand increases) and for business travelers it is less elastic or inelastic. However, airlines may
move their prices in tandem with competition and force buyers to pay market price until a price
war breaks out.
Firms Intensity and Rivalry
There is high rivalry in the airline industry. Due to this high rivalry airlines generally earn low
returns because competition drives down prices. The massive increase in the international prices
of jet fuel has put an enormous pressure on the airlines, to remain profitable. According to global
standards aircraft, crew, maintenance, insurance and fuel make up 68 percent of an airlines
operating costs. The primary beneficiaries of the price war are the domestic travelers as the
prices of domestic airfares have been substantially reduced.
The Pakistani airline industry has faced stiff competition from international competitors and our
aging fleet as well as combination of various other factors has led to an overall decline in our
competitiveness. A good comparison can be with the Indian airline industry.

The Indian airline industry has enjoyed much success and growth unlike Pakistan. Due to a much
larger population and increased urbanization the Indian Airline industry has had increased
number of airline flights as well as continuous growth in the sector. The Open Sky Policy in
India has led to much more increase in the number of players in comparison to Pakistan. The
Indian Airline industry expects to reach 4th World Rank by 2024 due to consistent growth
Pakistan Airline is still struggling to find its feet. The Indian government has abolished taxes,
reduced excise duty and abolished landing charges to assist its airline industry.

Unlike Pakistan the Indian Airline Industry is profiting from steady rise in the number of tourists.
There has also been an increase in the female business population which is also something that
Pakistan has neglected. This shows a much more open mindset of the Indians.
The use of CAT technology at Indian airports has helped pilots take off and move in low
visibility conditions. The bargaining power of buyers in India is low as they are large in number
and highly fragmented. The suppliers enjoy high power since the industry like Pakistan has few
players. However, there is forward integration in the Indian Industry.
Even though, the completion rivalry is high in India, the intensity unlike Pakistan is low as. This
is because many new airlines in India are emerging like Goair. It is expected that 6 new low cost
airlines will emerge in the coming years. The competition and rivalry has also forced mergers
and acquisitions.
Indian Airline has comparatively more strengths than Pakistan. One major strength is that of low
fares. Another is tourism as mentioned. The liberalized growth in India is another advantage. The
Indian government is paying more attention regarding the construction of new airports as well.
Like Pakistan it is also subjected to poor infrastructure but not the rising oil prices. The
government of India also heavily regulates their industry. India enjoys aviation growth of 20% in
passengers which is highest in the world. India also looking to double its passenger traffic over
the next decade.
One problem with the Indian Airline industry is that it is overly regulated by their government.
Unlike Pakistan it does not suffer from the cost of borrowing.
In sum, the Indian Airlines Industry continues to blossom while the Pakistan airline is still
under recovery.
However, we should not be very pessimistic about our industry since the performance of several
other competitors is worse than us for example that of the African airline industry.
In contrast to Pakistan, the African Airline industry is in turmoil and is referred to as the flying
coffins. The African aviation industry is overly regulated by the government and this has not led
to the growth. This is due to numerous restrictions on routes and market access. It was suggested
that the airline industry may be liberalized in 1988 to relax restriction and encourage growth
however no such implementation was there. State involvement and poor safety and security are
among other factors adversely affecting the industry and state involvement is hindering the full
liberalization of aviation in Africa. Such factors make it extremely difficult for effective
competition to take place as most African airlines are receiving state support in various forms.
Safety is a big issue in the flying industry. Most of the airlines in Africa are banned because of
this. It is quoted that in Africa planes are six times likelier to crash than elsewhere and travelers
swap tales of crises averted. In announcing the ban on virtually all aircraft overseen by civil
aviation authorities in Sierra Leone, Liberia, Equatorial Guinea, Swaziland and Congo from
landing at European airports, EU Transport Commissioner Jacques Barrot labeled many of the

planes flying coffins. In Nigeria late last year, two planes flying domestic routes crashed
within seven weeks of each other killing 224 people, including dozens of schoolchildren heading
home for Christmas holidays. Corruption is another cause of the troubles in the aviation industry.
A continent wide trend of economic liberalization may be fueling faster-than average passenger
growth as former state-owned airlines go private amid new competitioneven as poor
governments fail to adapt and oversee the growth.

Youve got the general problem of poverty and lack of government capacity. In Africa, everyone
is encouraged to privatize, but there is a very important role of the state, strengthening oversight
and regulatory mechanisms as you open up the economy, says Princeton Lyman, a former U.S.
ambassador to Nigeria.
Even many of Africas larger airlines fly secondhand aircraft purchased from overseas.
Many other airlines, particularly in vast Congo, fly rickety old jets or propeller-driven planes,
including some old military aircraft converted to passenger aircraft with the addition of plastic
patio-style chairs.

Stories proliferate of outrageous misfortunelike presidents wives commandeering entire


sections of the now-defunct Air Afrique for shopping junkets in Paris, stranding paying
passengers behind.
One solution might be banning castoff aircraft from former Soviet-bloc nations. Spare parts can
be hard to obtain and some of the aging planes maintenance documentation has been lost.

Weve witnessed accidents in countries with conflict, like Congo, Angola and Sudan, says
Elijah Hingosso, an official with Nairobi, Kenya-based African Airlines Association. Many of
these flights took place in areas outside of government control, so theres no oversight. Weve
also tended to notice in the past that many aircraft come from the former USSR.
Were urging governments to stop getting these old aircraft, said Hingosso, who says the
number of passengers is growing at between 6 and 7 percent annuallyslightly higher than the
global rate.

We can clearly see that the African Airline Industry is in a far worse position than that of
ours.